The United States Federal Reserve and Our Looming Housing Market Crash

When it comes to a natural disaster of epic proportions, people know exactly where all the damage came from. But when it comes to a national economic disaster of epic proportions, people could turn 360 degrees and see someone or something to blame.

It seems though Australia is headed for a market meltdown or a market freeze, depending on how one chooses to look at it. In Sydney and Melbourne, house prices are dropping like a proverbial rock, with the price of the national median house dropping a tad over 1 per cent during the June quarter.

The last time house values fell on an annual basis like this was back in June 2012.

Sydney and Melbourne make up around two-thirds of the country’s housing market, and their weakening house prices are taking a toll on the overall national growth rate. Sydney’s house prices plummeted by 4.5 per cent in the month of June, which is the biggest annual drop since 2008. Additionally, Sydney units dropped by 3.5 per cent during the same period in June.

One big factor playing right into the pending housing market disaster is lenders are tightening up the amount of credit that is available, making it harder for average people to buy a home, all the while, more and more new units are being built with no one able to purchase them.

Westpac Adding Fuel To the Fire

Westpac, one of the Big Four banks, has decided to increase its already high variable home loan rates, and people are betting their bottom dollar the rest of Australia’s financial institutions will follow right in line. Westpac CEO Brian Hartzer explained that the 0.14 per cent hike had to be done because “the cost has gone up” for borrowing the money used to fund people’s house loans.

Of course, Mr Hartzer blamed the Royal Commission for putting him through a “searing experience” and understands customers’ “frustration” over the whole deal. By doing this, Westpac is going against the usual cycle with the Reserve Bank, which maintained an official cash rate at an all-time record low of 1.5 per cent since 2016.

What Could Lead Australia’s Housing Market To Crash

Some experts say that a housing marking crash here in Australia is unlikely. Tristan Harrison, a contributor to The Motley Fool, said there are some factors that could force prices even lower than they are now.

Harrison stated that the first factor is an even more stringent assessment of how banks use the Household Expenditure Measure (HEM), a system used to measure basic living expenses. Commissioner Kenneth Hayne QC of the Banking Royal Commission could very well be one of the hands holding the falling axe when it comes to tougher lending procedures.

Commissioner Hayne slammed the banks for not fulfilling their legal duties requiring them to inquire about consumers’ financial status in a reasonable manner. Hayne accused the big four banks of paying more attention to how much money was coming into Australian households and little to no attention to how much of that income was going back out.

Saul Eslake, an independent economist, told ABC (Australian Broadcasting Corporation) the recommendations set forth by the Royal Commission might trigger what economists call “unintended consequences.” And those consequences reach beyond Australia’s borders, with the result being the Australian dollar getting bodyslammed by the US dollar.

Could We Learn a Thing or Two From Our British Cousins?

For three decades, the UK housing market boomed. While Australia’s young urban dwellers scrape and scrounge to save for the down payment on a shack in the sticks, the British have affordable housing down to an art. From minimalist flats tucked away above shops that line Regent Street to a decades-old scheme that offers low-income earners such as college students, teachers, and nurses affordable rentals in every part of London.

With seven out of 10 UK workers describing their financial situation as “chronically broke,” and only 30 per cent of the population saying that they live comfortable lives, the government and private organizations have had to come up with solutions. In addition to that, people in the UK have more options, which you can compare online, and free of charge. This forces the housing industry to be more price competitive.

The British housing market has been able to make a modest rebound from its own housing crisis that started in 2016 right after the Brexit vote. In September, prices rose by 2 per cent compared to prices in September 2017. It pales in contrast to the previous 5 per cent annual gain before the government chose to exit the European Union in June 2016.

But, Wait! It Doesn’t Stop There

Trade Minister Simon Birmingham warned on Tuesday that the trade war between the United States and China will have a direct impact on the Australian economy. “We urge all parties to step back from further escalating tariffs and to tackle trade-distorting subsidies or other issues,” Birmingham said.

Nevertheless, President Trump has promised to slap Beijing across the face with yet more costly tariffs in 2019, with an added threat of turning up the heat in the trade war if China retaliates. Brendan Rynne, the chief economist for KPMG Australia, stated that Australia will feel the pain far worse than Japan or the European Union.

And what does this do to the already hurting housing market here? Without a crystal ball, no one can tell. However, it’s one of those very heavy factors Harrison from The Motley Fool forgot to mention. But who’s to blame him? A book or two could be written on this issue – possibly a lot more.

Melissa Thompson
Melissa Thompson writes about a wide range of topics, revealing interesting things we didn't know before. She is a freelance USA Today producer, and a Technorati contributor.